Many people are concerned finding the best dealing model and execution for their trading strategy. In this article we hope to shed some light about Forex dealing models and what to look for when selecting a broker.
Three dealing models available to you: ECN, STP and Deal Desk. Each of these models has its advantages and disadvantages.
An ECN dealing model allows the many market participants to execute trades with each other through an electronic network. That’s what an ECN stands for; electronic communications network. As you know Forex is a zero sum game so for every winner there is a loser, for everyone going long there is someone going short. So what an ECN does is match up your order with the order of another market participant. You are probably asking yourself: Will there be a seller every time I am buying? Well there are market makers and banks in the ECN that are consistently providing liquidity through their market making operations.
Some benefits of using an ECN is you get anonymity as the other participants do not see who is trading on the other end and cannot flag your account and trade directly against you. Another benefit is you can make your own market by placing orders in between the bid and the ask.
One disadvantage to an ECN is that you do not know who is on the other side of your trade so that if there is an issue it is harder to get resolution than it would be with a deal desk. Also the ECN model does not always work with some of the more popular platforms such as Metatrader. Using an ECN is a good idea if you do not require Metatrader and are using a very short term strategy, a strategy that requires stop and limit order to be placed close to the market price or a strategy that is slightly predatory or aggressive in nature.
Some Forex brokers use the dealing desk approach. With this approach the dealing desk acts as a sole counter party on trades of all their customers and hedges their aggregate position based on predetermined risk parameters. Contrary to what people may believe, trading through a properly run deal desk may actually be advantageous.
Here are the advantages of going through a deal desk: The spreads typically stay fixed within a certain range under normal market conditions, you know who the counterparty will be every time in case you need to get issues resolved and platforms are usually more user friendly (such as Metatrader). Also aggressive deposit bonuses are typically available through deal desks.
There are however some disadvantages as well, the dealer will always know who you are, and you cannot go in between the bid and the ask or place limit or stop orders close to the market price. Using a deal desk is a good idea for all smaller accounts, strategies with limits and stops over 10 pips, and people that are looking for a deposit bonus. Dealing desk are also notoriously known as market makers as these brokers may undertake your position.
STP or NDD
There is another dealing model called STP, Straight Through Processing and it is also commonly known as NDD, Non Dealing Desk. With an STP platform, your orders are passed directly to liquidity providers that are in the system on the dealing firm. The key difference between as STP and an ECN is that your orders will not be matched up with other traders but will be passed directly to the liquidity providers. This is very similar to an ECN, but can work well with most platforms, such as Metatrader. Spreads are variable and some brokers offer very low spreads as they have better liquidity and technology. One type of an STP broker is Think Forex.
There are common pitfalls in trading with the above mentioned brokers and most of the time, the complaint is Stop Loss hunting. The common scenario a typical trader will experience is that when they buy to enter the market, the broker will undertake the trader’s buy position and go against them. Likewise similar short selling positions as well. Traders will faced their stop loss executed more often and eventually the market will go to their initial way of direction. This is a familiar scenario affected most traders. Well, if you are reading this article, you can relate this situation immediately.
How to deal with it then?
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